Do Taxes Impact My Credit Score?
When it comes time to pay your taxes, you might wonder what happens to your credit scores if you can’t make the payment or make it late.
Read on to find out whether your tax payment can impact your credit score.
How Can Taxes Impact My Credit Score?
Your taxes can impact your credit scores indirectly. This can happen if you pay your taxes by credit card or a loan, as it can affect your credit utilization ratio. With more money owed on your credit card, you can negatively affect your credit scores. We discuss this more below.
How Do I Know If I Have a Tax Lien On My Credit Report?
Tax liens are public records because they’re on file with your local government. However, before 2018, finding a tax lien on your credit report was relatively easy and reported to the three major credit bureaus. In 2018, tax liens were removed from consumer credit reports.
The best way to determine if a tax lien has been submitted against you is by contacting the IRS or looking for mail notices.
Can I Remove A Tax Lien From My Credit Report?
Tax liens are no longer included in credit reports from the three major credit bureaus.
However, if you have a tax lien, you should work to remove the lien. Making a payment arrangement with the IRS is possible, which is the best move if you cannot pay the total amount due in one payment.
How Long Are Tax Liens on My Credit Report?
Before the announcement that tax liens would no longer be visible directly on credit reports, they used to remain on your profile for seven and 10 years. If you paid the entire amount claimed by the tax lien, it would appear on your credit record for seven years.
In cases where you did not pay the total due amount, you would have had the lien on your report for a decade.
When Paying Taxes With A Credit Card
As mentioned previously, failure to pay your taxes according to your agreements with the IRS is not likely to directly impact your credit report. This, however, is also where a problem comes into play.
Many people pay their taxes with a credit card, which is possible and legal.
While it is convenient to use your credit card to cover the debt you owe the IRS, you should note that this can incur additional interest charges on your side if you don’t pay if off right away.
For example, if your credit card charges a 16.17% APR and you pay $10,000 to the IRS with this card, you could end up paying over $800 in interest. This accounts for a scenario where you decide to pay off the debt over 12 months.
Failure to make on-time payments for your credit card also can negatively impact your credit report and scores. Poor credit scores can make it difficult to gain access to financial services in the future.
When Paying Taxes With A Loan
Another way taxes affect your credit score is when you pay them with a loan. A personal loan to pay your taxes often comes with lower fees than using your credit card.
This makes it a more viable option for most people. However, you still need to pay interest and other charges on the loan.
If the monthly loan repayments dig too deep into your budget, you may have difficulty meeting all your debt obligations. This can lead to missed or late payments, which are factors that reflect negatively on your credit report.
Consider first trying to arrange with the IRS before you decide to take out a loan or use the funds in your credit card to pay what you are due.
The Bottom Line
While your taxes do not directly impact your credit report, it they can still affect your credit scores. Make sure you are careful when paying your taxes with s credit card or a loan.
Keeping track of your credit scores is always important, as this can help you see when your efforts to pay your taxes are impacting your credit report. You can also use MyScoreIQ services to monitor your credit report and scores and better understand what impacts your credit.